This is a story of pressure tactics and how (not) to reverse declining fortunes. In Greek mythology, Icarus and his father, Daedalus, were imprisoned on an island by King Minos. To escape, Daedalus created two sets of wings made of wax and feathers. He warned his son not to fly too close to the sun, as the wax would melt. Unfortunately, Icarus aimed too high and fell to his death. ‘…the Icarus syndrome characterises leaders who initiate overly ambitious projects that come to naught, causing harm to themselves and others in the process.’ Manfred F. R. Kets de Vries, Distinguished Clinical Professor of Leadership Development & Organisational Change at INSEAD.
In this parable, there is a corporate group of battery manufacturers who annually review the performance of individual sites. During one such review, it is discovered that a particular factory has underperformed for the past two years. In addition, in the first quarter of the new financial year, it had returned a worrying loss. Having posted a negative shift of over a quarter of a million dollars for the first quarter, there was a substantial reason for both concern and action.
A new operations executive arrives
After an emergency board meeting it was decided to bring in a new operations executive, to turn the situation around as quickly as possible. The deal was to show an improvement in six months and get back into profit by the end of the year. In hard cash terms, it meant generating an additional $300,000 of profit over nine months of trading, on an annual turnover of $60 million. As the board was aware, a CEO capable of turning around an ailing company would not be cheap. They were looking at around $250,000 in salary, almost doubling the profit requirement for that period. Highly paid headhunting companies were engaged to recruit a top executive with a solid track record in turning loss-makers into money makers.
After one month of searching, a person with the right credentials was found, able to begin within two months. The person chosen, Anthony, had an impressive track record of three high profile company turnarounds in the last 10 years – a pottery manufacturer, a retail organisation and a financial institution. At board level, it was considered that all businesses had a basic modus operandi, and that manufacturing was manufacturing, no matter the product or market. Anthony was in his mid-forties, a very tough and articulate proponent of goal-oriented management. Provide the targets and make sure that your goals exceed the requirements in order to ensure that you achieve them.
Spelling out the new targets
Once he had finished, he asked for comments. Then the hubbub began. All departments thought that they were doing a good job and that top management did not understand or appreciate their problems.
Darren, the production director, was first to voice his concerns. “Look, we all understand that things are going south but there are reasons,” he said. “In production, for example, our manufacturing equipment is ageing. We’ve had no real investment for the past seven years; we’re holding everything together with string and tape. The cuts you’re asking for are impossible to achieve: maintenance will be affected, manpower cuts will reduce output, and product quality will suffer as a result of pushing more out with fewer resources.”
Anthony acknowledged the comment but simply responded by asking if there were any more reservations. There were plenty. Alastair, the sales director, made the point that sales were hard to come by and poor output from the factory and missed delivery dates were responsible for the current shortfalls. Unless that was addressed, there was no hope of meeting existing, let alone new, targets.
The other departments followed in like manner; the technical director, Ramesh, was unable to cut material costs as the battery materials could not be compromised. The lead content – 70% of the cost was fixed by the battery capacity, the other materials, and processing costs would only provide several percent at best. Equally, the engineering and finance departments could not reduce their staff levels without plunging the factory into chaos. Anthony listened patiently to all arguments without any questions. Then, as the clamour subsided he addressed the meeting.
I understand your arguments. However…
“I understand your arguments and concerns about the difficulties you will face in implementing these changes; however, changes there must be. How else can you hope to prevent making these losses? If you are telling me that it is impossible, and that you are unable to make these improvements, then I have only one course of action. I will report back to head office and advise them that I am wasting my time here and that the current management is unable to deliver the required changes.”
He paused for effect, then slowly turned his gaze on each person around the room. “This will lead to one of two consequences: either the management will be replaced by more competent staff within the group, or this facility will be sold or closed for good.” Again, he paused. “So, do I have your cooperation, yes or no?”
There were a few moments of murmuring as a ripple of frustration passed around the table. Then, speaking for the other directors, the incumbent MD, George, made a statement. “We recognise that things have to change in order to get into profit,” he said. “However, there are specific issues that perhaps neither you nor the main board fully appreciates. We are the only manufacturer of forklift truck batteries in the group. You are not aware of the new companies from Taiwan and Korea that are actively flooding the market with cheaper batteries. At the same time, our other competitors are amassing huge stocks to enable them to deliver in a couple of days. If you add to this their 120-day payment terms, we are struggling to make any headway at all; we are even losing our market share.”
Anthony shook his head. “If your best response is to do nothing and allow the company to slowly bleed to death, then I may as well wrap this up now and save a lot of time, effort, and expense. Or, each department can deliver its recovery plans by Friday, based on the financial information already provided in your briefing packages.”
He paused again and looked slowly and directly at each person around the table. No-one spoke.
Taking your silence as a yes
“I will take your silence as a yes. We will meet again on Friday at 10:00 and I sincerely hope that you will not make any plans for an early start to the weekend. Good day, gentlemen.”
The activity for the next couple of days was frenetic. Whilst there was resentment towards the new CEO, all directors accepted that there had to be a solution. During this time, George left the company. At age 61, he took early retirement and seemed to be quite phlegmatic about the situation. The general consensus was that he was expecting this development and without any formal announcement or ceremony, it largely went unnoticed.
At the Friday meeting, each department made a presentation using spreadsheets and graphs to project the cost savings that would be realised if their measures were adopted. Derek, the finance director, was taking notes and listing the total projected savings for each department. The only departments not proposing any savings were sales and HR. In the case of sales, their proposal was to improve efficiency per person and increase revenue. The strategy was simple: allow lower prices and build up higher stock levels, and this should increase sales. For HR, it was even simpler. There were only three people in the department and could not make a 10% saving, it was mathematically impossible. In addition, there would be redundancies, new contracts, ACAS negotiations, etc. Their workload would double over the next year.
The other departments, however, did manage to identify savings and efficiency improvements. In summary, it looked like this:
Technical department
The total at that time was 13 staff; consisting of a designer, a lab manager, two lab assistants, a QA manager with three QA inspectors, three warranty engineers, and the technical director. George, the technical manager, proposed losing two of the warranty engineers who were near retirement age and one lab assistant who had just joined. A grand saving of three people, or 23% of his staff.
Production department
A 6% cut in the workforce mainly from the packaging and finishing departments, the loss of three shift supervisors due to the reduced output, and a transition from three to two shifts in all departments, gave an overall staff saving of 6.5% and an energy saving of 12%. There was a caveat to this. Greg the production director gave a warning that if production picked up, he could not respond and this could jeopardise the company’s recovery.
Engineering department
Bill, the engineering manager, gave the report. The proposals were maintenance staff be cut by three, due to the loss of the nightshift, and that the toolroom was to go. As a consequence, all tooling and moulds were to be outsourced, which was cheaper than employing full-time staff. This gave a further saving of three personnel. A total staff reduction of 30%.
Finance department
There were no staff reduction proposals from Derek, the finance director. He argued that he was already understaffed and that he would have a higher workload than before the changes. He did however point to possible material savings by changing suppliers for some process consumables. Alternative suppliers were also available that could provide certain battery components more cheaply – separators, containers, lids, etc. Energy suppliers had also been contacted to negotiate cheaper supply contracts. In his estimation, material costs and overheads could be reduced by at least 4%.
Once the costs had been collated by Derek, Anthony asked him if he could summarise all of the savings as a percentage of the total. This included direct and indirect operating costs. When Derek had given a reasonably accurate estimate, he passed the notes to Anthony, who announced that these measures were insufficient and that more savings were needed just to get to a break-even position. In fact, he added 20% to each department’s targets. When the inevitable 0.3 or 0.5 of a person issue came up, the solution was simple: round up to a whole person or find an equivalent cost-saving by some other means.
Protestations waved aside
Once the room was empty it was Anthony who spoke first. “I’m sure you are curious as to why I made that blanket 20% increase.”
Derek nodded. “Yes, of course, you could see perfectly well that the total savings would give a gross margin sufficient to get us back into profit,” he said.
Anthony leaned back in his chair, “I started life as a sports trainer 25 years ago,” he said. “I very soon found that if a training programme were left to the athlete or player, it would not push them hard enough. I further found that an increase of 20% would give that extra two or three percent in performance; that is the difference between winning and losing. It’s the same thing in business: if we need to achieve a 5% cost reduction, increase it by 20% and we will be more likely to meet the 5%. What’s more, I know it works and I have made a very successful career based on this simple principle.”
Derek wasn’t convinced and said so. However, he would reserve judgement until the results were coming in. The meeting now done, Anthony made one last parting comment: “You do realise that this also applies to you, Derek?”
Frenetic activity
After six weeks of frenetic activity, a reasonable picture of the company’s progress was emerging. Meeting Anthony’s targets was proving to be the stuff of nightmares; even meeting the original targets was challenging. During the latest progress meeting, each department had to provide its target status. Basically, no one had made the extra 20%, there were one or two instances where the original targets had been met. These were in the number of direct staff within the factory workforce. In this case, 11% had been obtained, thanks to a combination of removing one shift plus reorganising the warehouse area where orders were picked and wrapped.
The hardest task was the proposed materials cost reduction. Some new suppliers had been found, which at this point, added savings of 80% of Anthony’s target. Similarly, all other departments were getting to a point where the savings were edging closer to the original targets – without the extra 20% demanded by Anthony.
The meeting then homed in on the material costs. Clive, the purchasing manager, was responsible for the supplier negotiations. During his presentation, Clive indicated that, as a result of showing the current materials suppliers the quotes from alternative companies, he was having some success beating down their prices to match the competitors’ price quotes. These new prices, however, were still short of the 20% upgraded targets.
Anthony was the first to ask a question: “That’s good news, Clive. How soon do you think you will meet the targets that we agreed on?”
Clive started to explain that the best quotes from outside suppliers were consistent with the original targets, not Anthony’s revised goals. A tense discussion then ensued.
Derek interjected, “I know that our current supplier is totally unable to meet the revised target price, I personally spent many hours in deep discussions on this point,” he said. Anthony interrupted, asking if the alternative suppliers could meet the target prices.
Derek responded with gritted teeth: “It is possible that the new suppliers will be able to meet those prices. However, there are practical reasons why we need to run with the existing suppliers. If we change, then there are approvals, new specifications to be drawn up, new supply contracts, and new delivery schedules. Some of these new suppliers will struggle to meet the new delivery date and we do not have any experience with their reliability. Part of the cost savings will require minor modifications to be made to some of the components already approved by the technical department. These will all take time. In addition to this, we are now running out of time and further investigations will eat up more weeks of our programme. If we agree on these prices now, we can start the ball rolling and get back on target by using the original suppliers, but at a lower cost than we have now, and within 80% of the revised targets.”
No chinks in the armour
This was a non-starter with Anthony. If he allowed this, then all the other departments would be looking for concessions, which would increase the risk of missing the savings target; the project and the organisation would be undermined. He was intransigent and gave the assemblage one more week to meet the objectives. As they filed out, their original mood of optimism was replaced by a real sense of hopelessness, and even despair.
No one could see a way to achieve these savings without risk. In the case of production, a lack of workers would prevent increasing output if sales increased – at least not without a lot of overtime which would negate or reverse the cost benefits of a reduced workforce. Sales knew this and were now nervous about finding additional sales revenue. The technical department had to rely on new suppliers’ ISO 9000 quality records for material compliance rather than conduct their own tests. These were demoralising problems, and in each case, it appeared necessary that some element of risk had to be accepted in order to achieve the targets. And that is what happened.
At the follow-up meeting a week later, each department had put in a plan to reduce their costs to meet the target set by Anthony. New suppliers were appointed for most of the non-lead materials, incoming goods inspections were reduced to random checks with suppliers’ own analyses being accepted, and maintenance was no longer routine but ‘as required’. The sales department’s costs actually increased, as the search for new customers demanded more travel, entertainment and overnight stays.
All of the above concerns were raised and casually brushed aside with the comment: “If we don’t do this, we will close anyway. So where is the risk?”
The first casualty
At this stage, there was some relief, although tinged with caution, that the recovery plan had actually begun. Most people recognised that the company now had a fighting, albeit risk-burdened, chance for survival. It was imperative that the overall and individual department objectives be met according to the schedules. There were a lot of interdependent factors that had to happen in the right order to ensure that all the targets were realised.
Of course, that never happens in real life, and any plan without contingencies will pretty soon start to need some. The first casualty in the plan is usually the plan itself. In this case, it was the supply of new materials – the separators, in fact. The supplier had sent the wrong backweb thickness even though the overall thickness, including ribs and mini ribs, was within specification. It was only noticed after one week of production when the line inspector had a complaint from one of the cell assembly operators that the material felt too soft and the automatic sleeve welder was melting through the land area of the separator. This was not good news. Despite the first delivery being checked at incoming goods, subsequent deliveries were accepted on the supplier’s own analysis.
All the manufactured cells had to be checked and, if necessary, replaced or repaired by changing the sleeve separator on each plate in the group. This was costly, both in terms of staff and time. To make matters worse, it was part of a large contract with a new customer. The main reason for landing this order was the promise of an early delivery. It took three weeks to get the correct material in and a further two weeks to complete the first part of the contract. The first delivery to this customer was almost a month late. Existing customers also had late deliveries and were extremely unhappy. Some even cancelled existing orders and bought from competitors.
The turnover in the first two months of the leaner company was pitiful. About one-half of where it should have been. Because of the overtime to recover the lost production space and the reworking of the cells, the costs were eye-watering. This was now month four in the nine-month plan to achieve the level of profit necessary to break even by the end of the year. So far, savings had not been realised, costs were sky-high and sales were down.
Pressure mounts
By now, Anthony was receiving several calls a week from the board of directors. He explained his strategy and why it would give more profit in a shorter time due to his raising the cost-cutting and sales targets, despite the initial hiccough. He also emphasised the importance of sticking to the targets for every department, to avoid a precedent where underperformance could be tolerated. The call ended with an ultimatum to demonstrate a higher profit level by month five or rethink his position in the company.
The first two weeks of the month saw an increase in sales activity and revenue appeared to be improving. If the rising trend continued and costs were properly controlled, there would be a chance of reaching the required level of profitability. At a mid-month meeting, Anthony felt confident enough to put a positive spin on his tactic of increasing the target requirements. He claimed that without the additional measures, it would not be possible to claw back the early losses and still meet the overall profit objective.
The knockout punch
This was the knockout punch. The new customer cancelled all outstanding orders and wanted immediate and full recompense to the extent of replacing all the batteries with a competing brand as they no longer had faith in the product or the company’s survival. This time it was the factory directors who called an emergency crisis meeting and summoned Anthony to the boardroom.
Greg, the sales director, began with a tirade about the best deal in the factory’s history being squandered and how the sales team was utterly demoralised. Other departments threw in so many ‘I told you so’ cards, one could have played virtual snap.
Before Anthony could make any sort of response, it was Derek who took the floor. “I don’t think there is anything more to be said about our present situation. I have spoken to Sir Geoffrey at head office and filled him in on the financial details. Needless to say, my message was not well received, but he was glad that I had informed them in a timely manner. They expressed surprise that the message had not come from you, Anthony.”
Anthony was furious. “That’s because you jumped in too quickly and undermined any recovery plan that we might have come up with before informing them,” he said. “What do you hope to personally gain from this other than the satisfaction of seeing me fired?”
Derek was unperturbed. “There is already a contingency plan with head office. I prepared it yesterday and sent it last night. It was our original plan that you then upgraded by 20%. The financial analysis shows that the lower targets will lead to recovery and that we can get back into profit by the fourth quarter of the next financial year. The main board has accepted and endorsed this.
“Stay here! I’m calling the chairman”
Anthony was apoplectic. “What the hell, who gave you the right to….?” The sentence went unfinished. Anthony jumped to his feet knocking over his chair, then strode to the door. His parting words before slamming the door closed behind him were: “Stay here! I’m calling the chairman, Sir Geoffrey, to clear this up. I’ll be back in a few minutes!”
Derek sat down calmly and gathered his scattered papers whilst the rest of the directors stared open-mouthed at the door, then at Derek. Once his papers were in order and all eyes were on him, he spoke: “No, he won’t be back. But now we can get on with a proper recovery plan that is achievable.”
Incensed by the time he reached his office, Anthony furiously dialled Sir Geoffrey’s direct number. Once on the line, he immediately launched a scathing attack on Derek and the rest of the staff, who, he claimed, had let him down. He then began to ask for an extension to the schedule, in order to demonstrate that his changes had been effective. The company chairman, however, was stone-cold in his response. He simply asked Anthony what evidence he had that his changes were effective. Anthony immediately altered his approach. He argued that although he would not meet the set targets, he had installed genuine improvements which made the company a leaner operation and would be profitable, albeit less and later than he had originally planned. He also argued that with some creative accounting, the warranty losses could be amortised as development costs for a new product.
There was an extended silence before Sir Geoffrey finally answered: “Very sorry Anthony, I cannot allow that. You see, if we make concessions for one person, we would be expected to do the same for others. We would lose our credibility. You do understand, don’t you?”
